When valuing a company or calculating its market capitalization, it's important to be clear about which number of shares you are using because several different definitions exist and they're not interchangeable.

Let's start with authorized shares.

Authorized shares represents the maximum number of shares a company is legally allowed to issue as approved by its shareholders.

In practice management doesn't want to go back to shareholders every time. They need to issue a small number of new shares, for example, in relation to an employee share ownership plan.

So the authorized number of shares acts as a ceiling that is typically set higher than the current number of shares in circulation.

It's worth noting that in some jurisdictions, companies are no longer required to specify an authorized share capital number, but in many markets, including the United States, the concept still applies.

Next, we have issued shares.

This is the total number of shares the company has created and issued, whether they're currently held by investors or sitting in the company's own treasury accounts.

Then comes outstanding shares.

These are the shares actually held by investors in the market.

The number of outstanding shares are equal to the issued shares, minus treasury shares bought back by the company.

When a company buys back its own stock from the markets, those shares typically are not canceled.

Instead, they're held by the company and classified as Treasury Stock.

Treasury stock or treasury shares have no voting rights and don't receive dividends, but they can later be resold and would then be part of the outstanding share count. Again, within the context of outstanding shares, you might also come across the terms basic and diluted shares.

Here's a quick distinction.

Basic shares outstanding are the actual shares currently held by investors in the market.

Diluted shares, outstanding ads, shares that might exist in the future from contracts that already exist, things like employee stock options, convertible bonds, or restricted stock units diluted shares. Outstanding is calculated by taking The the basic share count and adding the impact of any in the money options or convertibles that would dilute existing shareholders.

And finally, there's free flow shares.

This describes the portion of outstanding shares that are actually available for public trading, strategic, or long-term holdings, such as those owned by founders.

Governments, or large institutional investors are excluded from the free float.

A company with a low free float typically has less liquidity and high share price volatility.

While a company with a large free float will tend to trade more smoothly.